In liquidation of a secured loan, which liens are paid first from the collateral?

• A. Senior liens are paid first from collateral, followed by junior liens.
• B. All liens are paid pro rata regardless of seniority.
• C. Only senior liens are paid; junior liens are not recoverable.
• D. Collateral is not used to determine recovery order.

Answer: (A)

In liquidation, who gets paid from the collateral is determined by lien priority. The proceeds from selling the collateral are applied first to satisfy the most senior liens. Only after those senior claims are fully paid do junior liens receive any remaining proceeds. If the collateral value isn’t enough to cover all senior liens, then junior liens may not be paid at all. This is why the correct approach is to pay senior liens first from the collateral, followed by junior liens.

This isn’t a pro rata distribution among all liens, and junior liens aren’t automatically written off—their recovery depends on there being surplus after the senior liens are satisfied. It also isn’t true that collateral isn’t used to determine recovery order—the value of the collateral combined with lien priority sets the distribution.